Czech Parties to Seal Coalition as Stimulus Debate Looms

Czech parties signed an agreement to
form a government that will face a dispute over whether to raise
corporate taxes to finance increased state spending after a
record-long recession.

Leaders of the Social Democrats, the ANO party and the
Christian Democrats signed the deal in Prague today, ending
negotiations following an Oct. 25-26 snap election. The Social
Democrats nominated Chairman Bohuslav Sobotka as the country’s
eighth prime minister in the past decade, while billionaire
businessman Andrej Babis, the head of ANO, is poised to take the
reins of the Finance Ministry.

The new government, which Sobotka predicts will take power
by mid-January, will aim to end the policy paralysis triggered
by the collapse of former Prime Minister Petr Necas’s cabinet in
a spying and corruption scandal in June. Two-year-old ANO
opposes the Social Democrats’ call for higher corporate taxes.
Babis has said he sees a “tough debate” on the issue.

“It wasn’t easy to find a program consensus among the
three parties,” Sobotka told journalists after the signing
ceremony. “I’m very pleased that the program we put together is
a realistic one. It gives hopes for a positive turnaround, hope
for supporting economic growth and employment.”

The coalition, which will hold 111 votes in the 200-seat
lower house of parliament, agreed to focus on supporting growth
as the $196 billion economy struggles to rebound from a
recession.

The three parties have pledged to keep the budget deficit
below the European Union’s limit of 3 percent of economic output
and agreed to keep taxes unchanged in 2014.

Special Levy

The coalition will discuss how to cover state spending for
2015 when preparing the next budget draft, leaving the option
open for a special levy on selected industries, such as banks
and utilities, if savings on the state’s operations aren’t
enough.

“The probability that the government program will be
fulfilled isn’t high,” Jiri Pehe, director of New York
University in Prague, said in a Jan. 1 note on his website.
“The coalition will be unstable, because it’s formed by two
parties and one anti-political movement. There is a risk that
the crisis of the basic institutions of the state and politics
may continue.”

Investors have largely overlooked the nation’s history of
political instability, including the recent months of coalition
negotiations.

Investment Programs

The yield on the country’s 10-year government debt has
averaged 3.8 percent over the past decade, compared with 5.6
percent for Poland, the EU’s largest post-communist economy, and
3.5 percent for higher-rated France. The Czech 10-year yield
fell 4 basis points, or 0.04 percentage point, to 2.51 percent
as of 4:50 p.m. in Prague.

The coalition will want to focus on state investment
programs in fields such as infrastructure, according to the
coalition document published on Dec. 13. The parties also
pledged to boost pensions and subsidies for children, abolish
most medical fees and stop diverting part of pension taxes into
private retirement accounts.